On Thursday, March 8, President Trump made good on a threat to slap tariffs on imported steel and aluminum, and hinted that there may be more to come. Revealed a week prior, news of the plan roiled still-skittish equities and had several of the US’ main trade partners talking countermeasures. For investors, that meant wading through talk of a potential trade war.

With barbs flying globally, let’s do a Who, What, Where, When, Why, and How on a range of tariff topics to help decipher what this may—or may not—mean for investors.

Source: FactSet

Who would be affected?

Several sectors appear to be in the crosshairs. After the tariffs plan was floated on March 1, the major US indexes fell, likely driven lower amid concerns about steel- and aluminum-dependent components contending with higher prices. Although less sweeping than proposed initially, the 25% levy on imported steel and the 10% duty on aluminum, could be headwinds for industries like aerospace and defense, autos, energy, manufacturing, and retail.

US steel and aluminum producers would seem poised to benefit. Also, it appears the market’s initial read was that domestic-focused small-cap stocks may be less affected by possible global tensions. The small-cap benchmark Russell 2000 has outperformed both the S&P 500® and the Dow Jones Industrial Average since the administration first announced the tariffs.

What are the risks?

The biggest risk is that a trade war breaks out should other countries eventually retaliate with tariffs of their own. For some market observers, that creates risks for the global economic growth story. There is also some thought the tariffs could be the start of a broader protectionist view of US trade policy that extends to other commodities and products.

Risks exist for consumers too, of course. In some ways, tariffs are simply another name for a consumer tax that subsidizes domestic production. If foreign steel and aluminum makers charge US manufacturers more for the materials they use to produce their products, it could embolden US producers to raise their own prices. Sooner or later, higher prices are likely to make their way into the prices of the cars people buy and the beer they drink.

Where are the US' trade partners on the issue?

Some made their displeasure known quickly. And it appears the administration took that into consideration. The signed proclamation leaves some wiggle room, as it excludes Canada and Mexico, which is particularly noteworthy given the ongoing North American Free Trade Agreement (NAFTA) negotiations. Further, any US trade partner can be exempted from the tariffs if they can prove how their national security would be negatively affected.

Canada, the largest supplier of foreign steel to the US, promised responsive measures following the initial announcement. China said it would respond accordingly to any efforts made to start a trade war. The European Union indicated that it would consider tariffs on select American-made products. Officials cited Harley-Davidson motorcycles and Kentucky bourbon in early responses. (Perhaps not so coincidentally, Harley-Davidson is based in House Speaker Paul Ryan’s home state of Wisconsin and Senate Majority Leader Mitch McConnell resides in Kentucky.)

When would the tariffs go into effect?

The tariffs become active in 15 days. Typically, this would be a lengthier process and include a petition to the US International Trade Commission. However, the administration opened a Section 232 investigation last year, a little known and rarely used provision of the Trade Expansion Act of 1962.1 Section 232 gives the president broad authority to implement tariffs should the Commerce Department find them necessary for national security.

Congress gave the executive branch that power, but possible avenues exist to block the measure. Reportedly, one possibility for dissenting lawmakers would be to include a tariffs rider in their forthcoming spending bill.2

Why is this an inflation and rates story too?

It’s all about prices. Rising inflation could prompt the Federal Reserve, which the market has interpreted as leaning hawkish recently, to raise interest rates more aggressively than forecast. The Fed's aim with such a move would be to keep the accelerating economy in check.

That could be a headwind for equities. Higher rates increase bonds’ attractiveness relative to stocks and make borrowing more expensive. Should companies decide to absorb price increases, it could squeeze their profits.

How may investors proceed?

The tariffs brought a different kind of uncertainty than, say, recent Fed-speak. The initial announcement on March 1 appeared to be more inflammatory for this increasingly sensitive market. Now that the tariffs proclamation has been signed, it’s something of wait-and-see moment to gauge how countries respond both before and after implementation.

For investors, all this tariffs talk argues in favor of taking news flow in stride, especially any verbal jabs that fly. As is often the case, sticking to an investment plan filled with a healthy mix of assets is a good way to tune out the noise and ease concerns about the unknown.

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The Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000® Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

S&P 500 Index is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the US stock market. All components of the S&P 500 are assigned to at least one of eleven S&P Select Sector Indexes, which track major economic segments and are highly liquid benchmarks. Stock classifications are based on the Global Industry Classification Standard.

The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 companies and then dividing that total by an adjusted value—one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities.

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